Are you about to pop the champagne after having your loan with the National Bank of Kenya (NBK) written off? Not too fast!
There is a new sheriff in town. Paul Russo, the new NBK boss, is on a mission to recover some of the loans that had been categorised as “write-offs.”
After the much-hyped takeover of NBK by KCB Group - which then appointed Russo to head its new subsidiary - the rot at the struggling lender must have hit the new team hard.
In an interview with Financial Standard last week, the former Group Regional Business Director at KCB Group hinted at what has for long been the stuff of speculation: dirty tricks that have seen the accumulation of write-off loans at NBK.
Although he was careful not to talk about the write-offs, past news reports largely blamed the bank’s poor non-performing loans for its troubles.
During the interview, Russo insisted that some of the answers to meeting the bank’s new financial target rest on fixing the thorny bad loan issue.
These loans, he insisted, are still in NBK’s books. “In a real sense, it is a write-down, because the debt doesn’t go away,” said the Human Resource guru in his characteristic husky voice.
That KCB has an iron grip on NBK as much as it has decided to retain the latter’s brand, is reflected in the fact that Russo has two offices.
One is at KCB’s Kencom House in the city centre, and the other one a few blocks away at National Bank Building on Harambee Avenue.
“The point where write-off comes to play is if my security was a house and the loan was Sh70 million and I sell the house at Sh68 million, I will have to write-off the Sh2 million,” explained Mr Russo, noting that a breach in governance principles was the trigger for all the financial woes that NBK has been facing.
“You lose governance at that level, the rest of the organisation… will dance to their own tune,” he said.
Russo did not disclose the nature of governance breaches.
However, last year, the then NBK management was summoned to parliament to shed light on the deals dubbed “write-offs” by the National Assembly’s Finance Committee.
While other lenders opt to hire loan recovery firms to pursue the borrower at a discount or attach property to recover funds, NBK is reported to have engaged its clients directly to reach a “gentleman’s agreement.”
The defaulter could agree to pay only part of the loan recoverable and be allowed to refinance and continue with the relationship with the bank after washing off the legacy debt, sources told The Standard then.
But it is herein that some bank staff went to some of the big clients and demanded kickbacks to effect the write-offs.
The newest bank boss has perhaps the hardest job of resuscitating a bank that has bled to near-death. Bad loans, estimated at Sh32 billion, have been the bane of NBK.
The share of the bank’s Non-Performing Loans (NPLs) ratio to total loans stood at 68.8 per cent in the nine months ended September 30 compared to 47 per cent in December last year.
This is more than five times the banking industry’s ratio of 12.5 per cent.
NBK’s soiled loan book is perhaps the only party-spoiler in KCB’s latest acquisition.
The financial health of the country’s largest bank is expected to take a hit after inheriting NBK’s high number of problem loans.
The new managing director said by June next year, they should have made significant progress in their bid to recover close to 80 per cent of the lender’s problematic loans, which translate to Sh25 billion.
Besides those who have had their loans written off, there are those who, for a reason or another, are unable to repay their loans but have securities.
If you fall into this category, your fate could soon be like that of Mumias Sugar Company that was recently put under the receivership as KCB Group sought to recover its money.
Similarly, the new team says they will solemnly have to take your land, office, house, car, or any other collateral if you can’t furnish your loan.
This is in a bid to put the cash-strapped lender back into a growth trajectory.
But Russo has some good news for those with non-performing loans (NPLs) but have the potential to grow.
They will jack you up and help you grow your business to a level where you can be able to repay the loan.
This is part of KCB’s strategy to turn-around NBK, which for a while has been in financial doldrums owing to a tonne of bad loans.
The strategy also involves doing a lot of clean-up in the lender’s leadership, with a purge on the management being the latest in the grand mop-up that has already seen the board reconstituted.
“For banks, the colours might be different, but the core of the strategy is the same. The difference is how you execute. The second bit is, if you check what makes the difference is the governance and structures associated with them,” said Russo.
“For NBK, that (governance) is just the only problem,” added Russo, noting that there was a “healthy tension between management and board.”
“Because if the board-management relationship becomes too tight, it is a disaster. Management executes delegated mandate. “Board only delegates the mandate. It can take it anytime. Saa zingine lazima tuonge ukweli (At times let us say the truth).”
His assertions are, of course, supported by Companies Act 2015.
The new law spelt out harsh penalties for directors who do not respond to call of duty as required by the Act.
Offending directors face a jail term of 10 years or fines amounting to Sh20 million.
Russo, who took over from Wilfred Musau, is bullish that the new team will recover most of the loans.
He promised this journalist that when NBK releases its financials in February, for the first time as a subsidiary of KCB Group, there will be a number of surprises.
He said there are big-ticket loan accounts which they are confident will offer them sufficient liquidity.
“If you look at the NPL book, top 30 will give you 80 per cent,” said Russo, noting that most of the defaulters are big corporates.
“My take is that they are genuine businesses. We will resolve all of them by June. That is how bullish I am,” he said.
The MD explained that for the write-down, they have brought in a third party - PWC. “The write-down is bigger than write-off, that is why we are confident about the entity.”
The new NBK board has also had to reshuffle a number of control positions in management. They have made changes in human resource change management, operation risk, information technology, corporations, mortgage, and treasury.
A disciplinary process on some personnel, including treasury, is ongoing. “In their financials, before we even went in, there was a treasury loss. It is not normal for you to get such a loss,” said Russo.
“If you are taking over, you must want to find out: what exactly happened? It is not likely that you are going to use the same people to find out what happened.”
This has seen some of the people who were dealing with the bonds sent home.
On the current decision by National Treasury to collect all the surplus funds from State corporations, Russo said unlike popular thinking, NBK did not have a lot of surplus funds for State entities.
He said that the only funds they had for State agencies were operational cash.
What is considered surplus, said Russo, is what has been put in Treasury-bills, Treasury-bonds and excess deposits.
“Many of them are not the entities that were targeted for those surpluses,” he said of the State funds at NBK.
It will not be easygoing for KCB. Rather than integrate NBK into its brand, KCB group decided to retain the chocolate-yellow colour scheme of the bank.
But it will be hard trying to pour new wine into old wine-skin.
The remedy to this, said Russo, is a dose of confidence, which is why they started by sending the board home.
“Board members have to demonstrate the framework they have put in place to ensure the visibility of what is happening in the organisation, and that the risks are acceptable.”